Rising tide of milk weighs on sentiment – Rabobank

The “rising tide of milk” has
seen sentiment in the global dairy industry begin to wane,
as growth in exportable surpluses across key milk-producing
regions gains momentum, according to Rabobank’s latest
Dairy Quarterly report.

The report says the global market
will “confront a wave of exportable surplus” in coming
months, estimated to be 3.2 billion litres higher
year-on-year (in liquid milk equivalents) for the six month
period October 2017 to March 2018.

“The recent growth in
global milk supply, which peaked in the last quarter of 2017
with the Oceania spring peak and a return to growth in
Europe, is taking its toll on global commodity prices,”
says Rabobank senior dairy analyst Michael Harvey.

“Even butterfat prices, which had
been defying gravity, have fallen in recent months,” he
says, “however the low stocks of butter and robust demand
are expected to support prices well above the five-year
average.

“Meanwhile skim milk prices remain depressed,
with the closure of the European intervention scheme
removing the floor and allowing prices to soften
further.”

While there is no immediate end in sight for
weak skim milk powder prices, which have dragged the whole
milk price lower, Mr Harvey says the global cheese market
has “fared best” with the buoyant importing of cheese in
countries like Japan and China providing support.

Mr
Harvey says with pressure expected to build on global
commodity prices, the first signs of weaker milk prices (in
local currency) have emerged in a number of export
regions.

“In New Zealand, Fonterra revised its current
full-year milk price lower during December, down by NZD
0.35/kgMS to NZD 6.40/kgMS,” he says. “Rabobank’s
forecast payout for the 2017/18 season has also been revised
slightly lower to NZD 6.30/kgMS, down NZD 0.20/kgMS on
previous forecasts and below Fonterra’s current
forecast.” While the growth in global exportable
surpluses is likely to place pressure on the global dairy
complex through to the middle of 2018, Mr Harvey says
“exportable surpluses are not expected to completely
overwhelm global markets, helped by strategies to limit
supply growth from processors”.

“China will also play
a key role in ensuring global markets remain ‘fairly
balanced’, with their import purchasing demand, assisted
by lower-than-expected milk supply and some improvements in
demand, expected to remain active throughout 2018,” he
says.

Mr Harvey says there is unlikely to be a smooth
recalibration of the dairy complex, however Rabobank is
forecasting a gradual tightening of exportable supplies
through the second half of 2018.

“Much will hinge on
production trends in Europe, and while supply growth is set
to continue, an easing of milk prices and efforts to contain
supply growth in some regions is likely to constrain
growth,” he says.

Dairy policy interventions in the EU
will be a key ‘watch factor’ in 2018, Mr Harvey says,
as well as the risk of a US exit from NAFTA, and
geopolitical tensions – all of which could create
volatility in global dairy markets.

New Zealand
outlook

Mr Harvey says in contrast to other key export
regions, New Zealand’s milk production has been disrupted
by unfavourable seasonal conditions, with the country
enduring a wet winter followed by a dry spring and early
summer.

“Milk production during August and September was
impacted by seasonal conditions, and while milk production
was more solid in October and November, the season-to-date
production is up by just 1.7 per cent,” he says.

“Milk
flows have now peaked and production levels during the
remaining months of the season will hinge largely on weather
conditions. The latest profiling from NIWA shows moisture
levels well-below average and the threat of drought and
weather disruption present significant risk to milk
flows.”

Mr Harvey says New Zealand dairy export volumes
were sluggish from August through to October and were 12 per
cent back on the same period in 2016.

“This overall drop
in export volumes on the previous year is largely
attributable to a significant decrease in shipments to
Algeria, with export volumes to this market down 80 per cent
on the same three months in 2016, a reduction of 40,000
tonnes,” he says.

“The fall in New Zealand dairy
exports to Algeria has been partially offset by increased
volumes into China. Exports to China totalled 133,000 tonnes
between August and October, a jump of 24 per cent in
comparison to the same period in 2016.”

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